Incentive Distortions Research Articles

Government investment in science and technology, digital transformation, and innovation in manufacturing enterprises

This study examines the relationship between government investment in science and technology (S&T), manufacturing enterprises’ innovation, and the moderating effect of digital transformation based on data from China's A-share listed manufacturing enterprises from 2011 to 2022. Findings indicate that government investment in S&T has an inverted U-shaped effect, where digital transformation mitigates the incentive distortion. The conclusions provide a valuable reference for strengthening resource allocation while augmenting enterprise innovation theories. The findings serve as a practical guide for manufacturing enterprises’ innovation in the digital era.

Estimating the use of ChatGPT in dental research publications

IntroductionGenerative artificial intelligence (GenAI) Large-language models such as ChatGPT have become increasingly popular in various fields. However, the impact of ChatGPT on dental research writing has yet to be quantified. This study aimed to assess ChatGPT's usage in dental research writing and discuss potential advantages and challenges. MethodsUsing a bibliometric design, we performed a keyword analysis of specific 'signaling words' indicative of ChatGPT use in the titles/abstracts of 299,695 dental research abstracts indexed PubMed 2018–2024. Statistical comparisons using normalized ratios per 10,000 dental publications compared changes in word frequency before and after the ChatGPT release on November 30, 2022. ResultsBefore ChatGPT's release, the frequency of abstracts with signaling words was 47.1 per 10,000 papers. After the release, this increased to 224.2 per 10,000 papers, an increase of 177.2 per 10,000 papers (p = 0.014, 95 % CI 53.5–300.7). The word 'delve' showed the most significant usage increase (increased ratio=17.0). ConclusionsThis study is among the first to systematically assess the use of GenAI, specifically ChatGPT, in dental research. We found evidence of the use and growth of ChatGPT in dental research publications. This trend indicates the widespread adoption of GenAI-assisted writing in scientific communication, consistent with other scientific fields. While GenAI can potentially increase productivity and inclusivity, it raises concerns such as bias, inaccuracy, and distortion of academic incentives. Therefore, our findings support the need for clear AI guidelines and standards for academic publishing to ensure responsible use and maintain scientific integrity.

Offsetting Distortion Effects of Head Starts on Incentives in Tullock Contests

Abstract In this study, we examine a contest scenario where each player possesses a distinct head start that skews their chances of winning, thereby creating incentive distortions from the efficient level and adversely affecting the contest designer. While affirmative action policies offer a straightforward solution to counteract these distortions, their implementation may not always be viable in real-life applications. We characterize the unique class of non-discriminatory contest success functions (CSF) that enables to achieve an efficient level of effort when there are two players. Additionally, we demonstrate that achieving a symmetric equilibrium is unattainable without affirmative action when the contest involves more than two players.

Distortion of agricultural incentives in East Africa: effects on agricultural value added

Distortion of agricultural incentives in East Africa: effects on agricultural value added

IMPACTS OF RISK PREFERENCE AND SOCIAL INSURANCE ON HOUSEHOLD FINANCIAL MARKET PARTICIPATION IN CHINA: ARE THERE DIFFERENCES BETWEEN URBAN AND RURAL RESIDENTS?

This letter examines the impact of risk preference and social insurance on household financial market participation and diversification using the 2017 and 2019 China Household Finance Survey. A multi-value treatment model is used to address the selection bias between risk preference and household financial investment, considering the moderation role of social insurance in between. Overall, our results show that high-risk takers are more likely to participate in the financial market and diversify their portfolios than low risk takers. Focusing on rural and urban differentials, we find marked differences in the impacts of risk preference and social insurance on household financial investment. Having social insurance may widen the difference in investment decisions between high- and low-risk takers in urban areas; the latter group tends not to participate in or diversify when socially insured. In contrast, having social insurance encourages low- and intermediate-risk preferred rural households to participate in the financial market and diversify their financial portfolios. Our work highlights the different consequences of social insurance on investment incentives of the rural and urban households. Whilst the obvious benefits of having social insurance for rural households via risk-sharing, there is undesired consequence of incentive distortion of urban households.

DEVELOPMENT OF CORPORATE RESPONSIBILITY OF BUSINESS IN THE SOCIAL SECURITY SYSTEM

The challenge and need of society in the 21st century is the development of corporate social responsibility. Corporate responsibility of business directly affects social security at all hierarchical levels of the economy. The purpose of the study is to extend the theoretical and methodical foundations and develop practical recommendations for the development of corporate social responsibility of enterprises. The following methods of inquiry were used during the study: economic-mathematical method, sociological method and method of expert assessment to assess the impact of corporate culture (CC) on corporate social responsibility (CSR); graphical-analytical to illustrate the processes under study. As a result of the study, methodical support for assessment of the impact of CC on the development of CSR was developed based on the systematization of methods for study of CC, indicators for assessment of the economic and social effectiveness of the impact of CC and development of methods for assessment of its impact on the activity of an enterprise and development of CSR. In conclusion, scientific and practical recommendations for the formation of positive CC at the microeconomic level were substantiated, which include the use of the proposed system of tools (organizational, economic, socio-psychological, information, etc.), a set of measures to improve labour motivation, overcome distortions in labour evaluation and labour incentives , use the potential of social partnership.

Regulating Digital Platform Ecosystems through Data-Sharing and Data-Siloing: Consequences for Innovation and Welfare

Digital platform ecosystems thrive on their ability to acquire and leverage user data across multiple data-driven services. This enables dominant platforms to harness insights obtained from their primary markets, where user data is collected, thus gaining a competitive advantage in secondary markets, where they exploit this data. While data cross-use brings about efficiencies, policymakers worldwide express concerns about the economic power and potential distortion of competition and innovation incentives associated with it. To address these concerns, two distinct and targeted policy interventions have been suggested: data-siloing, which restricts the cross-use of data within platform ecosystems, and mandated data-sharing with competitors. Using an analytical model that examines data cross-use in digital platform ecosystems, we analyze the impact of data-siloing and data-sharing obligations, and their interaction on competition, innovation, consumer welfare, and overall social welfare. Our findings indicate that an optimal policy involves data-sharing without data-siloing, whereas the EU’s Digital Markets Act currently mandates both types of data cross-use regulation.

Налоговая нагрузка НДФЛ и страховых взносов в Российской Федерации

Introduction: the period between 2000 to 2020 was marked by serious changes in taxation in the Russian Federation. The consequences of these changes for both the budget system and residents of Russia are still poorly studied, in particular, with reference to the impact of changes in social contribution rates and the introduction of various tax benefits on reducing income inequality. Such studies are necessary for both determining the degree of distortion in various incentives by tax policy measures and evaluating the effectiveness of these measures. Objectives: to assess the tax burden on individuals and households in order to determine the degree to which tax reforms comply with the originally stated goals, primarily, in terms of fairness criteria. Methods: analysis of distribution curves, regression analysis. Results: the tax wedge assessments based on the survey data revealed the differences between the actual level of the tax burden and the formal tax burden as well as tax evasion typical for low-income groups of the population. At the same time, there were no significant differences found in the tax burden distribution in individuals and households. Conclusions: the taxation system for individuals in Russia is regressive. The results obtained turned out to be robust to the choice of specifications of the estimated equations. It is important to note that there is a relatively high degree of regressiveness of the taxation scale in terms of insurance premiums and, at the same time, a bell-shaped dependence of the tax burden on the size of the payroll.

On the Role of Sales Taxes for Efficient Compensation of Property Loss Under Strict Liability

Abstract When a victim loses property due to an injurer’s wrongful act, it must be decided whether the damages award should include the sales taxes associated with the lost property’s replacement. This is especially acute when the victim can make other use of the damages award than replacement. This paper compares regimes that differ in how they treat sales taxes, focusing on possible distortions of consumption and care choices. We find that regimes that include sales taxes in damages awards only when incurred to replace the lost property (as, for instance, the German Civil Code does) induce suboptimal consumption and care incentives. Distortions of care incentives also depend on the nature of care expenditures (monetary or non-monetary).

What triggered China's urban debt risk? Snowball effect under the growth target constraint

The root causes and governance of subnational debt are intensely discussed in regional and policy research. This study contributes to literature by using the growth target constraints as a lens to investigate the boom of urban debt under political incentives. A theoretical analysis framework of growth target constraints and urban debt is constructed from the perspective of the full cycle of debt operation (financing–investment–repayment). Using the new-caliber urban construction investment bonds data of 270 prefecture-level cities from 2007 to 2015, we find that the competition for growth of subnational governments is the endogenous root of the boom of urban debt. The growth target constraint triggers subnational governments to carry out irrational debt financing through the leverage amplification effect of land leasing and mortgage, and to invest a large amount of financing in infrastructure construction. Unfortunately, these impulsive investments have low returns in terms of efficiency, which ultimately affects debt repayment. Accordingly, urban debt has shown considerable growth in this debt-stimulated model, which we attribute as the “snowball effect” of urban debt risk. This study provides empirical evidence of damage on urban finances caused by political incentive distortion. From these findings, reflections on governance policy for subnational debt in the context of China are drawn.

A new case-mix based payment system for the psychiatric day care sector in Switzerland: proposed methods for developing the tariff structure

In many European countries, there has been a shift towards outpatient psychiatric care over the past decades, as it is more cost-effective and resources for health care are limited. Switzerland, however, still has a high number of inpatient psychiatric hospital beds and a comparatively high length of stay. The existence of differing remuneration systems between inpatient and outpatient settings creates a distortion of incentives regarding the choice of treatment setting and an inefficient allocation of resources. To address this issue, a new tariff structure for day care treatment is suggested, based on the development and evaluation of the DRG-based inpatient remuneration system tariff psychiatry (TARPSY), using inpatient data from 2018, 2019, and 2021. The method involves three steps: estimating the day care treatment setting potential by delimiting cases from the inpatient patient data, adjusting the costs of this subset to approximate a day care treatment setting, and calculating daily cost weights based on the existing cost weights. The resulting reimbursements are about half of the inpatient reimbursements.To implement the tariff structure, this paper suggests that a number of framework conditions and regulations must be defined or modified. Additionally, subsequent cost data surveys from the day care setting can be incorporated into the calculation as part of a learning system. The remuneration system outlined in this paper could potentially be applied for day care psychiatry in other countries with DRG systems, especially in countries with conflicting remuneration systems in the inpatient and out patient sector.

Has Fiscal Decentralization Promoted or Restricted Public Environmental Expenditure ?

Public environmental expenditures are the crucial means to achieve ecological protection and environmental governance, while fiscal decentralization system is the key factor which affects the preferences of expenditures by local government. In order to further identify whether fiscal decentralization has negative incentives for the behavior of public environmental governance by local government, this paper applies provincial panel data of China from 2007 to 2015, to explore the effect of Chinese-styled fiscal decentralization on public environmental expenditures from the two dimensions of income and expenditure decentralization. The research results show that both income and expenditure decentralization have significant negative correlations with public environmental expenditures, which confirms that current fiscal decentralization system has strong incentive distortions and insufficient constraints on the behavior of public environmental governance by local government. Therefore, in order to promote green development and build a beautiful China, improvements should be made in terms of institutional environment, the relationship of financial authority and powers between central and local government, transfer payment systems, the governance models of regional linkage and collaboration, and environmental protection concepts, etc.

Has Fiscal Decentralization Promoted or Restricted Public Environmental Expenditure ?

Public environmental expenditures are the crucial means to achieve ecological protection and environmental governance, while fiscal decentralization system is the key factor which affects the preferences of expenditures by local government. In order to further identify whether fiscal decentralization has negative incentives for the behavior of public environmental governance by local government, this paper applies provincial panel data of China from 2007 to 2015, to explore the effect of Chinese-styled fiscal decentralization on public environmental expenditures from the two dimensions of income and expenditure decentralization. The research results show that both income and expenditure decentralization have significant negative correlations with public environmental expenditures, which confirms that current fiscal decentralization system has strong incentive distortions and insufficient constraints on the behavior of public environmental governance by local government. Therefore, in order to promote green development and build a beautiful China, improvements should be made in terms of institutional environment, the relationship of financial authority and powers between central and local government, transfer payment systems, the governance models of regional linkage and collaboration, and environmental protection concepts, etc.

Kidnapped mutual funds: Irrational preference of naive investors and fund incentive distortion

This study documents that mutual fund investors in Chinese stock markets confuse factor-related returns (FRR) with active alpha. This revealed preference “kidnaps” mutual funds to chase FRR instead of alpha. The observed distorted incentive is intensified among less sophisticated groups as evidenced by investor type and fund-rating heterogeneity. Investors' biased skill assessment is irrational, even if FRR is a vital part of investors' utility function, as there is performance reversal for funds assessed as top performers. We further showed that a distorted incentive to chase FRR undermines mutual funds' willingness to generate alpha by combating fundamental mispricing. Mutual funds cater to investors' preferences by creating more speculative short-term factor timing and holding more lottery-like stocks. Our findings question the widely held belief of the sophisticated Bayesian-agent paradigm in household financial decision-making and cast doubt on institutions' willingness to address mispricing, as suggested by the efficient market hypothesis.

Sunspot bank runs and fragility: The role of financial sector competition

What is the role of financial sector competition for instability when the potential for run behavior occurs with a non-trivial probability? How does the degree of fragility vary across competitive versus monopolistic banks? We study these questions in a version of the Diamond and Dybvig (1983) model of bank runs with limited commitment. In particular, we demonstrate that as the prospect of a run increases, competitive banks react prudently in issuing liabilities, leaving themselves less unstable. In contrast, if there is greater potential for consumer sentiment to deteriorate, agents’ incentives to run on monopolists are stronger over initially lower run probabilities but are weaker if crises are more likely to occur. Interestingly, the monopolist is only less susceptible to a panic over lower probabilities of crises while it is as fragile as its competitive counterpart in a more crisis-prone economy. Nevertheless, once bailouts are available, a higher run probability induces competitive banks to behave imprudently due to the incentive distortion. By comparison, agents’ inclination to run on monopolistic banks can either increase or decrease, depending on the structure of financial assistance. In addition, competitive intermediaries are more fragile if bailouts are large but this does not occur if fiscal transfers are small.

Does fiscal decentralization improve energy and environmental performance? New perspective on vertical fiscal imbalance

Chinese-style fiscal decentralization and vertical fiscal imbalance may cause substantial incentive distortion, which is not beneficial for public environmental governance. Based on China's provincial panel data from 2000 to 2017, the non-radial directional distance function is used to assess energy and environmental performance, then we examine the impact of fiscal decentralization on energy and environmental performance from the perspective of vertical fiscal imbalance. The results show that the divergence between revenue decentralization and expenditure decentralization leads to vertical fiscal imbalance, which significantly reduces energy and environmental performance. Meanwhile, there is regional heterogeneity in the influence of vertical fiscal imbalance. Vertical fiscal imbalance in the eastern and economically developed regions worsen energy and environmental performance, while the vertical fiscal imbalance in the central, western regions and economically backward regions improve energy and environmental performance since they receive more transfer payments. Different fiscal compensation methods have different impacts on vertical fiscal imbalance. In addition, the influence mechanisms show that vertical fiscal imbalance harms energy and environmental performance by inhibiting industrial structure upgrading and technological innovation and strengthening government intervention. Therefore, to reduce energy and environmental efficiency losses, we recommend deepening fiscal reform and controlling vertical fiscal imbalance.

Mandatory governance reform and corporate risk management

Using the Sarbanes-Oxley Act of 2002 as a quasi-natural experiment to identify the impact of corporate governance reform on foreign exchange risk hedging, we find that the substantial improvements in governance standards increased derivatives hedging and reduced foreign exchange exposure. The results are robust whether we consider initial reform gap or actual implementation, focus on legally required governance measures or include voluntary concomitant reforms. The economic magnitude of the effect is large. Our findings are corroborated by cross-sectional evidence, showing that firms with larger foreign markets exposure and a larger distortion in CEO incentives react more strongly to the reform. Financial hedges are implemented rapidly whereas exposure measures that encompass operational hedges take more time to adjust.

Board Monitoring and Advising in Dynamic Agency

Intuition suggests that shareholders benefit from active boards. We present a model to show that if contract renegotiation is possible, then an active board might not always be desirable from the shareholders' perspective. This happens because low board activity may partially offset the distortion in the manager's incentives caused by the renegotiation option. While the value of low board activity stems from the board's weak monitoring, a strong measurement effect of the board's advising in the manager's performance measures is necessary to implement it. In this case, a sufficiently independent board motivates a low level of board activity.

How has the minimum support price policy of India affected cross-commodity price linkages?

For several decades, the government of India has implemented a minimum support price (MSP) policy for agricultural commodities to reduce price risk levels for farmers. Concerns have been raised about whether this policy could affect market integration of related agricultural products, modify price incentives, and ultimately alter resource allocation and production between commodities. This study uses a panel vector auto-regression model across six states for the period 2002-2017 to analyse the effects of the MSP on the transmission of price shocks between cereals and oilseeds. The results demonstrate that the MSP partially and completely offsets price linkages between agricultural commodities, potentially introducing distortions in price incentives that affect land allocation and production between commodities. Beyond the effects of the MSP across commodities, Indian authorities can expect that price shocks on maize be transmitted to soybean over the next production period. Finally, this study demonstrates that the use of alternative data frequencies can identify differences in market reactions over time that can be related to production cycles and delays in price transmission.

Economic Efficiency and Distortions to Incentives in Production of Cotton and Rice Crops in Punjab

The study based on crop budgets, for 2010-12 crops, was, inter alia, designed to examine economic efficiency and distortions in incentives to production of cotton and basmati rice, long grain aromatic rice, crops in Punjab. The analysis has confirmed the competitiveness of their production in Punjab as farmers’ gross revenues from these crops exceeded their total costs, enabling farmers make some profit. The competitiveness, nevertheless, is sensitive to changes in prices of the produce and those of the inputs. The analysis conducted at economic prices have indicated economic efficiency and comparative advantage of Punjab in producing both basmati rice and cotton. The domestic resource cost coefficients for basmati as well as cotton were consistently less than one, confirming Punjab’s comparative advantage and economic efficiency in their farming. The estimation and analysis of nominal projection coefficients and effective protection coefficients for basmati and cotton crops have indicated implicit taxation as well as some protection to domestic producers. The results of economic efficiency and comparative advantage, of both basmati and cotton, are quite sensitive to the fluctuations and developments in world markets with spill over to the domestic market, impacting their competitiveness.